hinsafdar

If an investor purchases a 8 1/2s 2001 Feb. $10,000 par Treasury Note at 105:16 and holds it for exactly one year, what is the rate of return if the selling price is 105:16?

A) 8.50%.

B) 8.00%.

C) 8.06%.

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Purchase Price = [(105 + 16/32)/100] x 10,000 = $10,550.00 Selling price = [(105 + 16/32)/100] x 10,000 = $10,550.00 Interest = 8 1/2% of 10,000 = $850.00
Return = (Pend - Pbeg + Interest)/Pbeg = (10,550.00 - 10,550.00 + 850.00)/10,550.00 = 8.06%

hinsafdar

Value a semi-annual, 8% coupon bond with a $1,000 face value if similar bonds are now yielding 10%? The bond has 10 years to maturity.

A) $875.38.

B) $1,373.87.

C) $1,000.00.

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Using the financial calculator: N = 10 × 2 = 20; PMT = $80/2 = $40; I/Y = 10/2 = 5%; FV = $1,000; Compute the bond’s value PV = $875.38.

hinsafdar

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 12%?

A) $1,075.82.

B) $927.90.

C) $1,077.22

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FV = 1,000
N = 5
I = 10
PMT = 120
PV = ?
PV = 1,075.82.

hinsafdar

An investor gathered the following information on two zero-coupon bonds:

• 1-year, $800 par, zero-coupon bond valued at $762
• 2-year, $10,800 par, zero-coupon bond valued at $9,796

Given the above information, how much should an investor pay for a $10,000 par, 2-year, 8%, annual-pay coupon bond?

A) $9,796.

B) $10,558.

C) $10,000.

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A coupon bond can be viewed simply as a portfolio of zero-coupon bonds. The value of the coupon bond should simply be the summation of the present values of the two zero-coupon bonds. Hence, the value of the 2-year annual-pay bond should be $10,558 ($762 + $9,796).

hinsafdar

An investor gathered the following information on three zero-coupon bonds:

• 1-year, $600 par, zero-coupon bond valued at $571
• 2-year, $600 par, zero-coupon bond valued at $544
• 3-year, $10,600 par, zero-coupon bond valued at $8,901

Given the above information, how much should an investor pay for a $10,000 par, 3-year, 6%, annual-pay coupon bond?

A) $10,000.

B) $10,016.

C) Cannot be determined by the information provided.

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A coupon bond can be viewed simply as a portfolio of zero-coupon bonds. The value of the coupon bond should simply be the summation of the present values of the three zero-coupon bonds. Hence, the value of the 3-year annual-pay bond should be $10,016 (571 + 544 + 8,901).

hinsafdar

What is the present value of a 7% semi-annual pay corporate bond with a $1,000 face value and 20 years to maturity if it is yielding 6.375%? If a municipal bond is yielding 4.16% and an investors marginal tax rate is 35%, would the investor prefer the corporate bond or the municipal bond?

Value

Investor preference

A) $1,121.23 municipal bond

B) $1,070.09 corporate bond

C) $1,070.09 municipal bond

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N = 20 × 2 = 40; I/Y = 6.375/2 = 3.1875; PMT = 70/2 = 35; FV = 1,000; CPT → PV = $1,070.09.
The taxable-equivalent yield on the municipal bond is: 4.16% / (1 − 0.35) = 6.4%
The investor would prefer the municipal bond because the taxable-equivalent yield is greater than the yield on the corporate bond: 6.4% > 6.375%

hinsafdar

What value would an investor place on a 20-year, 10% annual coupon bond, if the investor required a 10% rate of return?

A) $1,104.

B) $1,000.

C) $920.

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N = 20; I/Y = 10; PMT= 100; FV = 1,000; CPT → PV = 1,000

hinsafdar

Georgia-Pacific has $1,000 par value bonds with 10 years remaining maturity. The bonds carry a 7.5% coupon that is paid semi-annually. If the current yield to maturity on similar bonds is 8.2%, what is the current value of the bonds?

A) $1,123.89.

B) $952.85.

C) $569.52.

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The coupon payment each six months is ($1,000)(0.075 / 2) = $37.50. To value the bond, enter FV = $1,000; PMT = $37.50; N = 10 × 2 = 20; I/Y = 8.2 / 2 = 4.1%; CPT → PV = –952.85.

hinsafdar

A bond with a face value of $1,000 pays a semi-annual coupon of $60. It has 15 years to maturity and a yield to maturity of 16% per year. What is the value of the bond?

A) $697.71.

B) $832.88.

C) $774.84.

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FV = 1,000; PMT = 60; N = 30; I = 8; CPT → PV = 774.84

hinsafdar

Which of the following statements about a bond’s cash flows is most accurate? The appropriate discount rate is a function of:

A) only the return on the market.

B) the risk-free rate plus the return on the market.

C) the risk-free rate plus the risk premium.

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The return on the market would be used only when discounting the cash flows of the market. The risk premium reflects the cost of any incremental risk incurred by the investor above and beyond that of the risk-free security.